U.S. corn-based politicians

wary of Brazilian ethanol deal

By Edmund L. Andrews and Larry Rohter

International Herald Tribune

WASHINGTON —  President George W. Bush, hoping to reduce demand for oil in the Western Hemisphere, is preparing to complete an agreement with Brazil in the coming week to promote the use of ethanol throughout Latin America and the Caribbean, according to Bush administration officials.

The agreement could lead to substantial growth in the ethanol industry in Brazil, where the fuel is made from sugar cane and is far cheaper than the corn-based ethanol that has been nurtured by protective tariffs and government mandates in the United States.

But the agreement has already begun to prompt complaints from politicians from corn-producing regions of the United States. They fear that the plan would lead to an increase in imports of cheap foreign ethanol and undercut U.S. producers.

By increasing ethanol production and consumption, particularly in countries that produce sugar, Bush administration officials hope to reduce the region's overall dependence on foreign oil and to take some of the pressure off oil prices. As a side effect, U.S. officials contend, the program could also reduce the influence of Hugo Chavez, the left- wing president of oil-rich Venezuela.

Bush is scheduled to meet in São Paulo in the coming week with Brazil's president, Luiz InácioLula da Silva.

Bush administration officials are hoping to complete a memorandum of understanding that calls for cooperation between the two countries on research and common standards for biofuels, as well as on helping other countries replicate Brazil's expertise in producing ethanol from sugar.

The agreement is largely a framework and provides few details, according to administration officials who have been briefed on the agreement but who spoke on condition of anonymity because it has not yet been completed.

Government officials in Brazil also said they were aware of the agreement.

In Brazil, senior government officials said the most important effect of a collaboration with the United States would be in promoting a broader international market for Brazilian ethanol technology.

"We want ethanol to become a global commodity, and for that to happen, Brazil can't be the only producer," said José Luiz Olivério, vice president for operations of Dedini Industries, Brazil's leading manufacturer of equipment for sugar cane and ethanol mills. "We've been growing and processing sugar for 500 years, and we are confident of our ability to maintain our leadership in this sector."

Between them, Brazil and the United States account for more than 70 percent of global ethanol production. The agreement is aimed at encouraging other countries, especially small and poor sugar cane producing countries in the Caribbean and Central America, to become producers.

"This is more than a document, it's a point of convergence in the relationship that is denser and more intense than anything we've seen in the last 20 or 30 years," Antonio Simoes, the director of the energy division of the Brazilian Foreign Ministry, said in a telephone interview. "Brazil will profit, the United States will profit, and so will third countries. It's a win-win situation for everyone involved."

"The good thing is that a poor country can reduce what it pays for imported oil and earn money exporting this," Simoes said. "That way they will have more money to invest in social programs, and the production of energy will be democratized in the world, with 100 countries producing energy instead of just 15 or 20."

Eventually, the two countries hope to use their accord to spur production of renewable fuels beyond the hemisphere. Brazil is interested in encouraging sugar cane-based ethanol production in Africa, where it has extensive trade and cultural ties, and in Asian nations such as Thailand.

Brazil's own direct exports of ethanol reached a record high last year. But demand for the fuel is growing so rapidly within Brazil that the government's immediate priority is to satisfy its domestic market.

But Brazilian business groups see commercial opportunities in supplying advanced equipment to other countries setting up their own ethanol distilleries.

U.S. officials expressed a similar enthusiasm for making ethanol and ethanol-producing equipment on a mass scale. The biggest area of cooperation, they said, will be in helping countries identify and remove obstacles to building their own ethanol production capacity.

But mindful of protests from domestic ethanol producers and from the powerful U.S. farm lobby, administration officials are not expected to even hint at a reduction in U.S. tariffs on foreign ethanol.

Nor does the administration appear ready to offer money or loan guarantees for construction of ethanol plants in other countries.

In a letter to President Bush on Friday, Republican Sen. Charles Grassley of Iowa said he failed to understand "why the United States would consider spending U.S. taxpayer dollars to encourage new ethanol production in other countries."

The proposed partnership, Grassley warned, could become a back-door way for Brazil to escape the tariff on imported ethanol that currently insulates U.S. producers.

The United States imposes a tariff of 54 cents a gallon on imported ethanol, but Caribbean nations and countries in the Central American Free Trade Agreement are exempt from those duties if they make the ethanol from products grown in their own countries. Using Brazilian technology for refining sugar-based ethanol, such countries could in time become exporters to the United States.

In addition, Caribbean nations can export a limited amount of ethanol that comes indirectly from Brazil and other countries. Under the Caribbean Basin Initiative, which has been in force for years, countries can take partially processed ethanol from a country like Brazil and carry out the last step in processing before shipping it to the United States. But the region is only allowed to export that kind of ethanol up to a limit of 7 percent of U.S. ethanol consumption.

Last year, the United States imported about 600 million gallons of ethanol, and about 200 million gallons came indirectly from Brazil through the Caribbean, according to Robert Dineen, president of the Renewable Fuels Association, a trade group that represents ethanol producers. The total imports of all kinds of ethanol amounted to slightly more than 10 percent of U.S. consumption last year.

For the moment, U.S. ethanol producers are watching warily but not protesting.

"I don't believe their fundamental objective of the administration is to produce ethanol in the Caribbean for export to the United States," Dineen said. But, he added, U.S. companies will be watching to see if the initiative becomes "the camel's nose under the tent."

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